Here’s the “quick and dirty” from our perspective: Lending activity isn’t dead, but it’s not very predictable right now either. While many aspects of the commercial real estate world have been put on hold during the COVID-19 pandemic, some areas remain active and are moving in a positive direction. Life insurance companies are still actively lending; however, each company takes its own approach to assessing new business. Unlike banks, life insurance companies are not regulated by a single agency at the federal level; rather, they operate under the guidelines of the National Association of Insurance Commissioners which are established at the state level. This allows them to operate with a higher level of autonomy. However, when a situation such as a pandemic disrupts the market, there is not a single overarching force guiding all life insurance companies to have the same response. This results in a significant variation in the appetite of lenders for new business.

Blaire Butler
Deputy Vice President
loan production,
Essex Financial

As a correspondent for over 25 life insurance companies in the Rocky Mountain region, we stay in constant contact with our lenders to understand their individualized approaches. At the end of April, we had identified three main themes for the community of life insurance lenders:

1. The struggle to find precise prices;
2. Reallocation of resources to portfolio review / management; and
3. The need for more care when taking out and closing loans.

Almost a month later, these themes remain relatively consistent, with the exception of significant progress in the allocation of internal resources. Many lenders have dealt with the numerous requests for debt relief that flooded them in April, which has helped reallocate resources to the origination side. The table shows the quotes for industrial, multi-family and retail loans received before the pandemic, compared to the current price of these same offers. These terms and prices are based on a collection of current quotes that we have received on active offers over the past two weeks.

In general, interest rates are around 50 to 75 basis points higher than they were before COVID, reflecting trends in BBB-rated corporate bonds, which are the benchmark that insurance companies -life use to price commercial mortgages. Many of the quoted interest rates we see today are between 3.4% and 3.9%, and we have seen the loan-to-value ratio drop by about 5%. Attractive quotes with several years of interest-only payments that were common earlier in the year have been reduced, although one to three years of interest-only is still available for some low-leverage claims (lower LTV at 60%). Lenders are spending more time assessing how each tenant’s business is affected by the pandemic in order to better understand each property’s current struggles and better anticipate future challenges. Frequent sponsor updates on rent collection and tenant requests for rent relief are helpful in predicting who will be the occupant and who will pay full rent at the time of financing. If there are tenants behind on rent or requesting relief, the lender can adjust the underwriting and / or incorporate a holdback structure to accommodate this. Finally, many lenders also incorporate debt service escrows to be financed at closing to eliminate any risk associated with short-term debt service.

There is still a significant amount of capital that insurance companies have allocated for mortgages in 2020, and that capital needs to be deployed. Lenders are looking to adapt and deploy this capital in an environment that looks very different from just two months ago.

Featured in the CREJ issue from June 3 to 16, 2020